Solutions more muddle than mettle

VERNON SMALL

Last updated 08:49 13/12/2012

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OPINION:
For politicians with a three-year shelf life, 40-year forecasts are about as useful as a chocolate teapot.

Yet at least every four years, the Treasury's mandarins are required to peer over their forecast horizon into the never-never land of projections to report on the long-term track for Government spending and the tax revenue to pay for it.

Previous reports in 2006 and 2009 have produced some perverse results. Rather than creating a constituency for change and sensible long-term planning, the numbers on, say, the future cost of superannuation or healthcare have looked completely irremedial without unacceptable - or more importantly politically unsaleable - measures.

Immediately after the global financial crisis, the 2009 report projected net debt would hit 200 per cent of GDP in the middle of this century.

Even accepting that the world will never have enough Japanese housewives and Belgian dentists to fund so much borrowing, it hardly helped politicians wanting to justify sensible short-term measures.

And in terms of one of the biggest future costs - superannuation - it served to further undermine confidence in the future of a state pension.

Given that most political solutions are more "muddle through" than grand vision, the Treasury has sensibly shifted its focus as it prepares its 2013 version.

This week, a two-day conference in Wellington threw the debate open to the public. Some younger citizens, who might actually be around to see the projections pan out, were included as were a brace of politicians to bring a touch of real politik, albeit from down the pointy- headed end in the shape of former finance minister Sir Michael Cullen and former National thinker, now OECD director, Simon Upton.

At the same time the Treasury is putting some assumptions under the spotlight.

Its attempt to revive a debate over a land tax was shot full of holes by the panel and is unlikely to play any part in its final report.

Sir Michael added to the mix the "known unknowns" of future shocks akin to the Christchurch earthquake that are inevitable but unforecastable over the next 50 years.

In addition, the Treasury is questioning if it should assume that welfare payments will be indexed to consumer prices. Not only does that clash with experience but over the long run it opened a huge and unsustainable gulf between projected wages and benefits.

Meanwhile, the conference grandees gave the Treasury a polite towelling for its assumption that labour productivity would grow an average 1.5 per cent - taken from the OECD's assumption across economies - when history suggests New Zealand has clocked up only 1.2 per cent. Together those changes could make gloomy projections even darker but there were some flashes of optimism too.

Professor Norman Gemmell outlined how a little bit of fiscal creep might help on the revenue side.

By adjusting tax thresholds only for price movements, the slow drift of income into higher tax brackets - from an average tax rate of 27 per cent now to 32 per cent - revenue could almost match the extra social spending by 2060.

Even the ageing population may not be all bad news.

Older people pay more tax and consume more, and a higher ratio of older and middle-aged to young workers can deliver a measurable "productivity dividend".

None of that changes the fact that health and superannuation will likely gobble up 19 per cent of GDP by 2060, up from 11.5 per cent now.

Health spending is driven less by ageing, however, than by the rising cost of medicines, new technology and wages to compete for health professionals in a global market.

Perversely, as Upton pointed out, attempts to curb health spending during the recent global crisis have seen the axe fall on primary healthcare - the last place you should make cuts.

Next year's long-term projections, due about July, may not provide the answer to the age-old political questions, such as how you can persuade voters they should pay more, get less, work longer - and possibly sell their house to fund their retirement.

Or how, having done what you should do for the long run, you avoid getting voted out in the short term. But at least the projections will be more closely tied to reality than in the past, and for that the Treasury deserves praise.